Question 1

According to the interest-rate-based transmission mechanism for monetary policy, a decrease in the money supply will cause the

Accepted Answer

A) interest rate to fall, causing planned real investment spending to rise and leading to a decrease in aggregate demand. 
B) interest rate to rise, causing planned real investment spending to rise and leading to a decrease in aggregate demand. 
C) interest rate to fall, causing planned real investment spending to rise and leading to an increase in aggregate demand. 
D) interest rate to rise, causing planned real investment spending to fall and leading to a decrease in aggregate demand.

Question 2

Which of the following is TRUE of the Fed's credit policy?

Accepted Answer

A) The Fed has implemented a credit policy since 1914. 
B) Today about 40 percent of the Fed's asset holdings are related to its conduct of credit policy. 
C) The Fed's credit policy is extended only to U.S. financial institutions. 
D) The Fed's objective for its credit policy is to reduce the federal funds rate.

Question 3

When households choose to hold money as a store of value, rather than holding assets such as certificates of deposit, stocks, and bonds, ________ demand for money results.

Accepted Answer

A) liquidity 
B) transactions 
C) precautionary 
D) asset

Question 4

According to the quantity theory of money and prices, a 2 percent increase in the money supply ultimately leads to

Accepted Answer

A) a 2 percent increase in real GDP. 
B) a 2 percent increase in wages. 
C) a 2 percent increase in the price level. 
D) a 2 percent increase in velocity.

Question 5

According to the equation of exchange, if M = $400, P = 8, and Y = $200, then V equals

Accepted Answer

A) 100. 
B) 4. 
C) 160. 
D) 8.

Question 6

One of the economic costs of holding currency is that

Accepted Answer

A) it fulfills no precautionary role. 
B) it fulfills no transactions role. 
C) it earns no interest income. 
D) its real value always increases.

Question 7

According to the equation of exchange, nominal GDP equals

Accepted Answer

A) the amount of actual money balances times the income velocity of money. 
B) the amount of actual money balances divided by the income velocity of money. 
C) the price level divided by the income velocity of money. 
D) the price level times the income velocity of money.

Question 8

The direct effect of an increase in the money supply is

Accepted Answer

A) people will spend the extra money, causing the aggregate demand curve to shift to the right and prices to rise, and causing the economy to go into recession. 
B) people will save the money, causing an increase in bank deposits, causing interest rates to fall, and loans to expand. 
C) people will save more money, causing a decrease in economic activity and a fall in prices. 
D) people will spend the extra money, causing the aggregate demand curve to shift to the right, creating an increase in economic activity.

Question 9

The relationship between the quantity of money balances demanded and the interest rate is

Accepted Answer

A) determined by open market operations. 
B) negative. 
C) contractionary monetary policy. 
D) the reserve requirements.

Question 10

Which of the following is associated with a contractionary monetary policy?

Accepted Answer

A) lowering the differential between the discount rate and the federal funds rate 
B) selling bonds 
C) lowering the required reserve ratio 
D) raising bond prices

Question 11

Proponents of the interest-rate-based monetary policy transmission mechanism argue that when the Federal Reserve buys bonds, there will be

Accepted Answer

A) an increase in investment spending. 
B) a decrease in the money supply. 
C) a decrease in nominal Gross Domestic Product (GDP), but not in real income. 
D) a decrease in the price of outstanding bonds.

Question 12

The identity stating that the total amount spent on final output equals the amount received for final output is known as the

Accepted Answer

A) fundamental law of economics. 
B) circular flow identity. 
C) equation of exchange. 
D) identity equation.

Question 13

The monetary transmission mechanism that assumes that money supply growth stimulates the economy primarily by encouraging investment is

Accepted Answer

A) the interest-rate-based transmission mechanism. 
B) the classical transmission mechanism. 
C) the post-Keynesian transmission mechanism. 
D)  pre-Keynesian transmission mechanism.

Question 14

Bertha holds some of her savings as currency and coins placed in her sewing basket. This is an example of

Accepted Answer

A) precautionary demand for money. 
B) asset demand for money. 
C) transactions demand for money. 
D) wealth demand for money.

Question 15

What is a primary determinant of the asset demand for money?
I. the interest rate
II. the opportunity cost of holding money
III. the supply of money

Accepted Answer

A) I only 
B) III only 
C) both I and II 
D) both II and III

Question 16

An expansionary monetary policy is one that

Accepted Answer

A) stimulates aggregate supply. 
B) reduces aggregate supply and aggregate demand. 
C) stimulates aggregate demand. 
D) reduces aggregate demand while stimulating aggregate supply.

Question 17

According to the interest-rate-based monetary policy transmission mechanism, which of the following monetary policies would result in an increase in the level of planned real investment spending?

Accepted Answer

A) contractionary 
B) expansionary 
C) reactionary 
D) Monetary policy has no effect on investment.

Question 18

Suppose the actual federal funds rate is equal to the rate implied by a particular inflation goal. In this situation, the Taylor rule implies that

Accepted Answer

A) monetary policy will tend to produce that inflation rate. 
B) monetary policy is contractionary. 
C) monetary policy is expansionary. 
D) fiscal policy will result in a balanced budget.

Question 19

The equation of exchange is a formula indicating that the number of monetary units times

Accepted Answer

A) the number of times each monetary unit is spent on final goods and services is identical to the price level times real GDP. 
B) the price level is identical to the number of times each monetary unit is spent on final goods and services times real GDP. 
C) real GDP is identical to the price level times the number of times each monetary unit is spent on final goods and services. 
D) nominal GDP is identical to the price level times the number of times each monetary unit is spent on final goods and services.

Question 20

-In the above figure, assume the aggregate demand of the economy is AD₂ and the Fed actions move aggregate demand to AD₁. In this situation, the Fed has practiced

Accepted Answer

A) contractionary monetary policy. 
B) expansionary monetary policy. 
C) irresponsible fiscal policy. 
D) Keynesian fiscal policy.

Exam 15: Domestic and International Dimensions of Monetary Policy